With High-deductible Employer Health Plans, Who Wins?

For a growing number of Americans, high deductible health plans are a fact of life. The trend started a decade ago and shows no signs of disappearing. At many firms, it’s the sole health insurance that’s offered for employees.

The assumption is that if employees have to fork over more money when seeing a doctor or filling a prescription, they will have “skin in the game” so they’ll use their health care benefits more selectively and avoid wasteful or unnecessary procedures and drugs. You might put off treating minor ailments like “your achy knee, your cold that won’t go away, or your kid’s earache or sore throat,” says Drexel professor of health management and policy Robert I. Field who is also a lecturer at Wharton.

Wharton health care management professor David Asch gives the example of going out to dinner on your own dime versus an expense account. You’ll naturally be more frugal, says Asch, who is also executive director of Penn Medicine’s Center for Health Care Innovation. Similarly, if you have expensive homeowners insurance that only covers catastrophic events, you might be more cautious in your home, “less likely to put the paper towel rack next to the toaster.” (Although hopefully people won’t do that under any circumstances, he says.)

“People think more carefully when they’re spending their own money instead of someone else’s,” Asch says.

Moreover, high-deductible plans boost companies’ bottom line by shifting more costs to the employee. The IRS currently defines a high-deductible health plan as one with a deductible of at least $1,350 for an individual or $2,700 for a family, according to healthcare.gov. Field notes that many deductibles are in the range of $5,000 to $6,000. Hence, workers pay more medical costs out of their own pocket, as compared to traditional health plans, before the insurance company starts picking up the coverage. On the positive side, people’s monthly premiums are typically lower.

The plans have gained popularity among business owners. In 2014, 41% of consumers with employer-provided coverage had individual deductibles greater than $1,000, up from 22% in 2009, according to the Quarterly Journal of Economics. Moreover, the share of employers offering only high-deductible coverage increased markedly from just 7% in 2012 to 24% in 2016.

Wharton health care management professor Atul Gupta notes that employees and unions have pushed back on such plans because of their high cost to consumers. Field adds, “People really resent those plans where they feel that it looks like insurance, but it really isn’t because you have to put up so much of your own money.” Some major companies have started to backpedal, including JPMorgan Chase and CVS, according to an article last year in the Insurance Journal. JPMorgan announced it was effectively eliminating deductibles for workers making less than $60,000 a year. CVS, which had switched all of its employees to high-deductible plans, became aware that some workers had stopped filling critical prescriptions and was reportedly re-evaluating its policies.

“You wouldn’t want me to use an expensive brand-name drug for my heartburn when I could use a much less expensive generic… [On the other hand,] you don’t want me to stop taking my insulin. But high-deductible health plans do not discriminate between those two purchasing decisions.”–David Asch

Could the Plans Rein in America’s Medical Spending?

But most experts believe these plans aren’t going away anytime soon. And some are investigating whether their use might help decelerate America’s breakneck medical spending. “With health care spending rising faster than [the U.S.] GDP, reducing the growth rate is a primary health policy goal,” write Leonard Davis Institute associate fellow Molly Frean and Wharton health care management professor Mark Pauly in a recent National Bureau of Economic Research working paper, “Does High Cost-Sharing Slow the Long-term Growth Rate of Health Spending? Evidence from the States.” They, too, note the widespread use of high-deductible health plans: in 2018 the proportion of workers with a general annual deductibles reached 85%, and their average deductible was $1,573 for individual coverage. Frean and Pauly conclude that these plans “may have a part to play” in slowing overall health care spending growth by making people use their benefits more judiciously, but they don’t believe it is a comprehensive solution.

Gupta, Field, and Asch all believe that the idea of high-deductible health plans may hold promise for reducing overall costs, but not significantly, at least in their current form. “I think it’s one tool, but overall it’s not going to be a game-changer,” Field says. Gupta agrees, adding that while research on these plans has shown that people do cut back on care, “the reduction isn’t very large — it’s [only] on the order of 5% to 10%.”

The share of employers offering only high-deductible coverage increased markedly from just 7% in 2012 to 24% in 2016.

Examining other types of cost-driving factors may actually have a bigger impact on the American medical system, the experts add, referring to overpriced new medical technologies, the outsized bargaining power of certain large providers, and wastefulness in the health care system itself.

Another issue with high-deductible plans is whether they truly lead people to make good decisions about when they need a doctor and when they don’t. Asch says this is a major problem: Most people just don’t have the medical expertise to distinguish between high-value and low-value care.

“You wouldn’t want me to use an expensive brand-name drug for my heartburn when I could use a much less expensive generic,” he says. “[On the other hand,] you don’t want me to stop taking my insulin. But high-deductible health plans do not discriminate between those two purchasing decisions.” They rely on the patient to make the call, he says, and while some people can do that effectively, many cannot. To make things even more confusing, he says, the expensive drugs are the ones that get advertised directly to consumers, spurring demand for them.

Gupta agrees, describing medicine as “an expertise-based service where you basically do what the doctor asks you to do…. The average consumer doesn’t very often know what’s wasteful and what’s not wasteful.” He says some research shows that people in high-deductible plans tend to reduce their use of all kinds of health care. “They may do less MRIs — sometimes MRIs may be low-value — but they also do it for preventive care like vaccines,” he notes. “So because they cut back on care indiscriminately, there’s a view that perhaps in the long run these plans merely delay the costs… until the problem becomes more severe.”

One of the expectations implicit in high-deductible plans was that consumers would price-shop for lower-cost services, for example finding the cheapest place to get an X-ray. But Gupta says this really hasn’t panned out, even with some large companies making price transparency tools available to employees so they can view the negotiated prices of their insurer with different providers. “Consumers don’t really use these tools, and even when they do, it doesn’t lead to a big change in their behavior,” he said.

Different Employees, Different Needs

Field, Asch and Gupta also observe that the effectiveness of high-deductible health plans can hinge on whether the employee in question is well-off or low-income, younger or older, healthy or living with a chronic condition. “What companies can tell their employees is, ‘Look, we can offer you a lower premium if you take the high-deductible health plan,’” says Gupta. “And if you’re relatively healthy, you’ll also be better off. But if you expect to use a reasonable amount of care, these plans get pretty expensive.”

“People really resent those plans where they feel that it looks like insurance, but it really isn’t because you have to put up so much of your own money.”Robert Field

Field says that there needs to be some kind of accommodation for people at lower income levels and those who are sicker. “If you have diabetes or high blood pressure or cancer [for instance,] you’re almost certain to have to lay out the entire deductible. So it penalizes those people who are sickest, and also those with the lowest incomes because they’re the least likely to be able to afford the huge deductible.”

He also notes that a deductible of several thousand dollars means something very different to someone who’s making $20,000 a year than someone who’s making $100,00 a year or $1 million. “So one size doesn’t fit all in terms of discouraging excessive health care use.”

Field adds that some businesses may reckon that even if high-deductible plans cause employees to avoid routine care — potentially increasing the risk of illness later on — the plans are still worth it financially. “From an individual employer’s point of view, they might not be responsible for that because by the time the patient gets sick, they may be working for another company or be retired and on Medicare.”

Some firms help employees manage the risk of high-deductible plans by also offering a tax-sheltered health savings account (HSA) — either contributed to by the employer or not — which can be dipped into in case of a more serious medical condition. Asch says that working for a company that has generous HSA benefits can make a big difference in how effective the plan is.

It also reveals something about a company’s motivations, he says. If a high-deductible health plan is paired with a good employer-sponsored HSA, it suggests that the employer is thinking about helping workers have skin in the game and “kind of right-sizing or optimizing their care.” But if it’s not combined with such an arrangement, he said, it suggests pure cost-shifting. “The plan costs [the company] less; it costs the employees less, but then they get an [unpleasant] surprise at the end.”

Looking to the future, Gupta thinks high-deductible plans are here to stay, although “they may have plateaued, because maybe companies tried to push them too far.” But he believes there will always be a base demand, especially among certain demographics. “They appeal to younger individuals, and if you’re pretty healthy, then these plans are cheaper,” especially when combined with an HSA.

“I think the challenge is, we still don’t know how to make them truly efficient,” he says.

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